Indian Rupee Stands Out in Emerging Markets, Favored by Carry Traders, Says Bank of America Corp

Indian rupee has caught the eye of carry traders because of its stability and affordability as compared to other currencies in emerging markets, as per Bank of America Corp. This stability owes a lot to the Reserve Bank of India keeping interest rates steady for a while now and India's record foreign exchange reserves, Bloomberg reported.

“If you hold it for the carry, you don’t have much risk that it will depreciate a lot, which would be a greater risk in some of the other carry trades,” David Hauner, head of global EM fixed-income strategy at the bank stated in an interview.

Bloomberg's data reveals that among Asian currencies this year, going long on the rupee is the sole carry trade strategy that has yielded positive returns against the dollar. This trend is also backed by the fact that the one-month implied volatility in the dollar-rupee pair has reached its lowest point in a decade, largely due to the RBI's firm control over the currency's movements.

Although the rupee doesn't offer as high yields as the Mexican peso or Turkish lira, the risk of a market correction is considerably lower, as noted by Hauner. He believes the rupee's fair value is around 82.50 to the dollar, which is over 1 per cent higher than its current level.

During the MPC meeting, held last week, RBI Governor Shaktikanta Das stated that the rupee's stability reflects India's strong economic fundamentals, financial stability, and improved external outlook.

According to the report, the rupee's appeal as a carry trade currency has led to overcrowding as well, with JPMorgan Chase & Co. waiting for better entry points. Goldman Sachs analysts said that the rupee's attractiveness for carry trades increases when paired with short positions in the euro and Chinese yuan.